NAIC Updates October 2017

Transcription

1 STROOCK & STROOCK & LAVAN LLP NAIC Updates October 2017 Status of Covered Agreement Between EU and U.S. The NAIC Reinsurance (E) Task Force ( RTF ) held its most recent open meeting on Monday, August 7, 2017 during the NAIC 2017 Summer National Meeting in Philadelphia, Pennsylvania. During the meeting, the RTF heard a status report on the proposed Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance ( Covered Agreement ), which was subsequently executed by the United States and the European Union on September 22, The Covered Agreement will eliminate reinsurance requirements for EU reinsurers that maintain a minimum amount of own funds equivalent to $250 million and a solvency capital ratio (SCR) of 100% under Solvency II, and allow U.S. reinsurers to do business in the EU without local presence so long as they maintain capital and surplus equivalent to 226 million with an RBC of 300% of Authorized Control Level. As discussed below, the NAIC had initially voiced opposition to the Covered Agreement during the negotiation process between the U.S. and the EU. However, the September 22, 2017 policy statement released by the U.S. in tandem with its execution of the Covered Agreement seems to have assuaged many of the NAIC s concerns. Background Prior to the execution of the Covered Agreement, the NAIC participated in a hearing on the Covered Agreement before the House Financial Services Committee s Subcommittee on Housing and Insurance on February 16, 2017, and also submitted a letter to Treasury Secretary Steven Mnuchin on March 15, During the negotiation process, the NAIC consistently voiced numerous concerns with the form of the Covered Agreement. Over the last several years, the NAIC prioritized the reduction of reinsurance consumer protection collateral requirements, and the majority of states have passed legislation to implement the NAIC Credit for Reinsurance Models. Accordingly, if Models #785 (Credit for Reinsurance Model Law) and #786 (Credit for Reinsurance Model Regulation) were adopted as accreditation standards, the NAIC believed the states would already have accomplished the goals of the Covered Agreement. In its March 15 letter, the NAIC urged caution in considering the terms of the Covered Agreement, noting the following concerns: 1. Elimination of Collateral Requirements: The NAIC letter noted that states had taken measures to reduce, but not eliminate collateral requirements, relying on a riskbased approach with collateral requirements STROOCK & STROOCK & LAVAN LLP New York Los Angeles Miami Washington, DC 180 Maiden Lane, New York, NY T F

2 ranging from 0% to 100% based on an assessment of the financial strength of the reinsurer and quality of its supervision. Noting that the conditions required of EU insurers under the Covered Agreement differ materially from current state credit for reinsurance laws, the NAIC expressed concern that states may have to take alternative measures to ensure that ceding U.S. insurers, and, by extension, U.S. policyholders are protected from any risks posed by reinsurance counterparties. 2. Group Capital Assessment: The Covered Agreement suggests the states should impose a capital requirement... at the group level of a U.S. insurer, rather than at the legal entity level. As the NAIC does not currently require additional capital at either level, the NAIC is concerned that this requirement could result in increased costs for U.S. insurers. 3. Group Supervisory Framework: The Covered Agreement could disrupt existing group supervisory authorities, as it appears to place conditions upon the use of longstanding regulatory authorities to protect U.S. consumers. Essentially, the Covered Agreement would limit supervision of EU reinsurers, even those operating in the U.S., to EU supervisory authorities. Progress of the Covered Agreement As required by Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ), the Covered Agreement was submitted to Congress on January 13, 2017 by the U.S. Department of Treasury ( Treasury Department ) and the Office of the U.S. Trade Representative ( USTR ). In an open meeting on April 9, 2017, the RTF explained that if Congress took no action against the Covered Agreement within the 90-day congressional review period required by Dodd-Frank, the Treasury Secretary would be authorized to execute the agreement. On April 13, 2017, the 90 days elapsed, and Congress had thus far not taken any action. Against the NAIC s advice, plans to execute the Covered Agreement continued to move forward under the Trump administration. On July 14, 2017, the Treasury Department and the USTR issued a joint statement of intent to sign the Covered Agreement in the near future, and on September 22, 2017 both the United States and the European Union executed the Covered Agreement. That same day, the U.S. released a policy statement to offer clarity on some of the Covered Agreement s more contentious provisions: With regard to the elimination of collateral requirements, the U.S. policy statement clarified that the Covered Agreement does not prevent a state insurance regulator from imposing noncollateral requirements that do not have substantially the same regulatory impact as collateral requirements as conditions for ceding companies to enter into reinsurance agreements with EU reinsurers or to allow credit for such reinsurance, if the state insurance regulator applies the same requirements in the case of reinsurance agreements with U.S. reinsurers domiciled in that state. As to group capital requirements, the United States expects that the NAIC s group capital calculation will satisfy the group capital assessment condition of the Covered Agreement, and the Covered Agreement does not require a group capital assessment with respect to U.S. insurance groups that do not have operations in the EU. With regard to supervisory requirements, the policy statement also clarified that U.S. insurance supervisors are able to obtain information about the EU parent of insurers that are active in the United States, if necessary, to protect against serious harm to U.S. policyholders, or a serious threat to financial stability, or a serious impact on the ability of an insurer to pay its claims in the United States. STROOCK & STROOCK & LAVAN LLP 2

3 In addition, the Covered Agreement provides for a Joint Committee which will serve as a forum for consultation and to exchange information on the administration and proper implementation of the [Covered] Agreement. The policy statement recognized the important role of U.S. state insurance regulators, noting that because they will be largely responsible for implementing the Agreement, the United States is committed to the direct involvement of state insurance regulators, including their staff, in the work of the Joint Committee. To this end, the United States will consult with state insurance regulators, and will establish a robust consultative process to ensure that discussions in the Joint Committee will be well-informed of the views and interests of state insurance regulators. This policy statement was well-received by the NAIC, and seems to have addressed several of the NAIC s concerns. Shortly after the policy statement was issued, NAIC President and Wisconsin Insurance Commissioner Ted Nickel released a statement on the NAIC website noting that the NAIC is pleased to see the Treasury and USTR clarify their interpretation of the covered agreement, and that the NAIC has worked closely with Treasury and USTR on these clarifications and appreciate[s] their affirmation of the primacy of state regulation. However, the NAIC generally disfavors the use of covered agreements as a mechanism to set U.S. insurance policy and, in his own statement in response to the U.S. policy statement, NAIC CEO Mike Consedine thanked the Treasury and USTR for working constructively to resolve [NAIC] concerns with the [C]overed [A]greement, but caution[ed] against using this mechanism in the future. Looking Forward Now that the agreement has officially gone into effect, U.S. states have five years to implement its reinsurance provisions or face potential preemption by the Federal Insurance Office. The RTF noted, and the U.S. policy statement confirmed, that the Covered Agreement will not apply retroactively to contracts that are already in force, and will only be available to new or renewal business or newly amended contracts involving only prospective reinsurance. While it reduces the reinsurance collateral to 0% for many EU reinsurers, the Covered Agreement retains several important elements from the NAIC s credit for reinsurance models, including requirements with respect to enforcement of final U.S. judgments, service of process, financial reporting requirements, prompt payment of claims and solvent schemes of arrangement. Finally, now that the Covered Agreement has been executed, the NAIC plans to form a specific structure to oversee its implementation along with the RTF, which will also play a crucial role in the process. Qualified Jurisdictions At its Summer Meeting on August 7, 2017, the RTF heard the report of the Qualified Jurisdiction (E) Working Group. At the 2016 Summer National Meeting, the Working Group had been charged with the task of studying and reporting on the implementation of Solvency II by the European member-states, and to assess the potential impact on the Qualified Jurisdiction Status of France, Germany, Ireland, and the UK. The Working Group was advised by NAIC leadership to hold off on any public recommendations given the uncertainty surrounding the Covered Agreement, which, if executed, would render the Qualified Jurisdiction status of EU member states moot. Given the public statement of intent to sign the Covered Agreement issued by the Treasury Department and USTR on July 14, 2017, the RTF determined that the Working Group should discontinue work on the report unless and until it becomes relevant again. As the Covered Agreement was officially executed by both the U.S. and EU on September 22, 2017, it is unlikely that work on the report will be reinitiated. Despite the execution of the Covered Agreement, the Working Group s charge is still relevant in at least one respect. As the Working Group noted at the RTF s August 7, 2017 meeting, the Covered STROOCK & STROOCK & LAVAN LLP 3

4 Agreement includes a five-year grace period for U.S. states to come into compliance. Accordingly, the states now have 60 months to adopt reinsurance reforms removing collateral requirements for EU reinsurers that meet the prescribed consumer protection conditions, and until the states have done so, the Qualified Jurisdiction status of the EU member states will remain relevant. The designation as a Qualified Jurisdiction is valid for five years, and all seven current Qualified Jurisdictions (Bermuda, Japan, Switzerland, France, Germany, Ireland, and the UK) were approved as of January 1, As such, each must be re-evaluated no later than December 31, Because the five-year compliance period of the Covered Agreement will still be in effect at that time, the RTF charged the Working Group with performing a re-evaluation of all seven Qualified Jurisdictions, including those in the EU, before the current designations expire on December 31, Finally, the Working Group reported that it has received an application from another EU member state requesting designation as a Qualified Jurisdiction. It was noted that the evaluation process is very time-consuming and can take up to a year to complete, but because the Covered Agreement has essentially validated Solvency II as an effective supervisory system, the Working Group may be able to make a recommendation as early as the Fall National Meeting in December of 2017, with a proposed effective date of January 1, Taking into account the five-year compliance period of the Covered Agreement, the RTF agreed that evaluation of the EU applicant as a potential Qualified Jurisdiction remained worthwhile, and directed the Working Group to proceed in preparing a recommendation. Reinsurance Collateral Ratings Credit for Reinsurance Model Regulation (#786) Acceptable Rating Agencies During its Summer Meeting on August 7, 2017 the RTF heard an update from the Reinsurance Financial Analysis (E) Working Group regarding an issue referred to the Working Group during an RTF conference call held on June 13, The Working Group had been asked to consider Kroll Bond Rating Agency ( Kroll ) as an acceptable rating agency for purposes of certifying reinsurers under Model #786 (Credit for Reinsurance Model Regulation), which provides that [a]cceptable ratings agencies include [...] Standard & Poor s; Moody s Investors Service; Fitch Ratings; A.M. Best Company; or any other Nationally Recognized Statistical Rating Organization (NRSRO). There are open questions that must be addressed. Specifically, the Working Group must first determine the applicable tiers that would correspond with a given NRSRO s ratings under Model #786 s Secure 1 to Vulnerable 6 rating system. The current regulation provides for specific tiers for each rating issued by an NRSRO and the Working Group would need to determine the applicable tiers for any new rating agency. Moreover, the Working Group must devise a means of providing uniform guidance to the states, absent revisions to Model #786. The Working Group plans to have a specific recommendation for the RTF at the Fall National Meeting in December of Acceptable Financial Strength Ratings During the RTF conference call on June 13, 2017, there was also an update on a matter referred to the RTF at its Spring Meeting on April 9, At that meeting, the RTF was asked to consider a referral from the Reinsurance Financial Analysis (E) Working Group regarding reinsurance collateral ratings of certified reinsurers. In particular, the Working Group asked the RTF to consider when a group rating would constitute an STROOCK & STROOCK & LAVAN LLP 4

5 acceptable financial strength rating under Section 8(B)(4) of Model #786, which provides that [e]ach certified reinsurer shall be rated on a legal entity basis, with due consideration being given to the group rating where appropriate. It was noted that in Fall 2016, the Working Group added a provision limiting the acceptable age of a financial strength rating to 15 months. As many legal entity ratings are older than 15 months, but many group ratings are less than 15 months old and would thus still qualify under the new provision, the RTF exposed the Working Group s referral for a 30-day public comment period. One comment was received from the RAA recommending a broad interpretation of appropriate, so as to allow the group rating to be used under most circumstances. The Working Group held a regulator-to-regulator session via conference call on March 30, 2017, to discuss revisions to the Uniform Application Checklist for Certified Reinsurers. Rather than prescribe a blanket treatment of group ratings, the Working Group created a Protocol for Considering A Group Rating ( Protocol ). If the financial strength rating is not on a standalone basis, the Protocol requires a rationale for the group rating based on the following: 1. The rating agency clearly described within the rating report that the group rating was used as a result of sufficient legal entity interconnectivity through financial and operational activities; 2. The ratings agency enhancement to a group rating was based on the subsidiary s potential benefit from parental capital support; 3. The group rating was used because the subsidiary derives benefit from its inclusion within a financially strong and wellcapitalized insurance group; 4. The lead state has contacted the rating agency and was provided a written explanation for the use of the group rating; and 5. Other factors deemed appropriate by the Working Group. The RTF agreed at the Spring Meeting on April 9, 2017, to expose the revised Uniform Application Checklist for Certified Reinsurers for a 30-day public comment period. During the June 15, 2017 conference call of the RTF, it was announced that three comments had been received (from the American Council of Life Insurers (ACLI), the Reinsurance Association of America (RAA) and Transatlantic Reinsurance Company (TransRe)), which prompted additional revisions to the draft to further assist the states in the passporting process, as well as reduce confusion and duplication of efforts. Representatives of the ACLI, RAA, and TransRe each confirmed their satisfaction with the draft Uniform Application Checklist as revised, and the RTF unanimously adopted the revisions. Proposed Accreditation Standards At the Reinsurance Task Force s August 7, 2017 meeting, the RTF also heard an update on a proposed accreditation standard. At its Spring Meeting on April 9, 2017, the RTF addressed a proposal that the new Term and Universal Life Insurance Reserve Financing Model Regulation (#787) (adopted in Fall 2016), as well as the 2016 revisions to Model #785 (Credit for Reinsurance Model Law), be adopted by the NAIC as a new accreditation standard. Also known as the XXX/AXXX model regulation, Model #787 establishes uniform, national standards governing reserve financing arrangements pertaining to term life and universal life insurance policies with secondary guarantees, and ensures that funds consisting of primary security and other security are held in the forms and amounts required. The revisions to Model #785, adopted on January 8, 2016, authorize insurance commissioners to issue regulations with respect to XXX and AXXX-type life insurance policies and variable annuities, along with other life and health insurance and annuity products STROOCK & STROOCK & LAVAN LLP 5

6 covered by NAIC credit for reinsurance regulations. At the Spring Meeting, the RTF made a recommendation to the Financial Regulation Standards and Accreditation (F) Committee ( FRSA ) to adopt the proposed accreditation standard, and to have an expedited effective date of January 1, A draft accreditation standard was prepared, and reviewed by the RTF in a regulator-to-regulator session on May 31, Notably, the draft did not include the 2016 revisions to Model #785 as part of the standard, leaving adoption of those revisions to each state s discretion. In addition, the draft retained the proposed effective date of January 1, 2020, despite coinciding with the effective date of principlebased reserving, as the drafters reasoned that a state s compliance with Actuarial Guideline XLVIII Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (Model #830) (AG 48) may be satisfactory to the FRSA for those states that are unable to meet the effective date of the new Model #787 accreditation standard. The RTF approved the draft accreditation standard and exposed it for a 30-day public comment period which ended on July 13, The NAIC received a comment from New York Life Insurance Company, together with Northwest Mutual Life Insurance Company, in favor of adopting Model #787 as an NAIC accreditation standard, but recommending (1) inclusion of the 2016 revisions to Model #785, and (2) inclusion of Model #787 s Prohibitions on Avoidance provision, which prohibits transactions that are designed to circumvent the regulation s purpose and intent. Without nationally consistent enforcement, the companies reasoned, some users and promoters of life insurance captives may pursue structures that comply as a technical matter, but violate the regulation s spirit. At its Summer Meeting on August 7, 2017, the RTF unanimously adopted the draft accreditation standard for Model #787, with the inclusion of the Prohibitions on Avoidance clause, and a recommended effective date of January 1, Investment Security Standards At the Reinsurance Task Force s August 7, 2017 meeting, the RTF also heard an update from the Reinsurance Investment Security (E) Subgroup. Following the Spring Meeting, the Subgroup met on several regulator-to-regulator calls to review an investment product with the goal of clarify[ing] the concept of investment security for reinsurance collateral purposes under Model #785 [Credit for Reinsurance Model Law] and Model #786 [Credit for Reinsurance Model Regulation], and the concept of primary security for XXX/AXXX captive reinsurance transactions under Model #787 [Term and Universal Life Insurance Reserve Financing Model Regulation]. The Subgroup evaluated the investment product, along with the applicable Model guidance and provisions from the Purposes and Procedures Manual of the NAIC Investment Analysis Office ( P&P Manual ), and developed a recommendation to assist the [RTF] in adopting standards that can be utilized when future investment requests are received. The recommendation supported by the majority of the Subgroup included the following: 1. Individual investments should not be identified as suitable under Model #785 and Model #786. It was noted that where an investment is part of a Regulatory Transaction, such suitability identification limits the commissioner s ability to evaluate the acceptability of the investment and prevents the commissioner from specifically approving or disallowing the investment. 2. No security [should] be considered as Primary Security under Model #787 when the receipt of cash flows from the issuer of the investment is affected by the financial STROOCK & STROOCK & LAVAN LLP 6

7 condition, actions, assets or obligations of the investment s holder, the holder s affiliates, or the holder s overall holding company group. Such securities are to be considered part of a Regulatory Transaction. 3. Regulatory Transactions must be considered collectively with all other transactions involving affiliates, the overall holding company group, as well as with unaffiliated companies used as intermediaries between the insurance reporting entity, and affiliated entities or the overall holding company group. 4. Securities considered part of a Regulatory Transaction shall not be considered SVOlisted or qualify as Primary Security. The RTF voted unanimously to expose the report of the Subgroup, including the majority recommendation, as well as the minority position, for a 30-day public comment period. Unclaimed Life Insurance Benefits The Life Insurance and Annuities (A) Committee ( LIA ) met on August 7, 2017, in Philadelphia, Pennsylvania at the NAIC Summer National Meeting. Among other matters, the LIA Committee heard the report of the Unclaimed Life Insurance Benefits (A) Working Group. The Working Group met on March 7, 2017, to discuss comments received on the draft Unclaimed Life Insurance and Annuities Model Act. Due to a lack of consensus with respect to the proposed model s applicability to existing and future policies, contracts, and retained asset accounts, the Working Group had adopted a motion to suspend its work on the new model pending additional guidance from the LIA Committee. The Working Group noted that consensus had been reached on many issues, but without agreement on the pivotal issue of applicability, there is concern that the proposed model will not achieve the requisite two-thirds vote of the membership. At the Spring Meeting on April 7, 2017, a representative of the ACLI suggested disbanding the Working Group, noting that 24 states have adopted laws addressing unclaimed benefits, and that it is unlikely that a model will achieve the required 2/3 vote at this point. Acknowledging that [a] vote in favor requires a commitment of resources to pursue the adoption of that law in the state legislatures, several others agreed that a 2/3 vote was unlikely. On the other hand, a representative for the Center for Insurance Research indicated that the proposed model would formalize standards, and that it would result in poor optics for state insurance commissioners to abandon the issue. By way of compromise, the LIA passed a motion to have the Working Group develop a concise list of key controversial issues in the draft proposed Unclaimed Life Insurance and Annuities Model Act for review by the LIA Committee. The Working Group met again on June 8, 2017, to identify and discuss the three most controversial issues that were likely to impede the 2/3 vote necessary to adopt the draft as an NAIC model. The top three issues, as identified by the Working Group, centered on the applicability of the proposed model: (1) retroactive application, (2) prospective application, and (3) asymmetrical application. On July 27, 2017, the ACLI submitted a letter recommending abandonment of the proposed model, in light of the Working Group s inability to reach consensus and the fact that many states have already taken action of their own on the issue. At the open meeting on August 7, 2017, it was noted that the Unclaimed Benefits Model Drafting (A) Subgroup and had worked hard to achieve consensus, but was ultimately unable to do so, and that it would be impractical to continue debating the model at this point. Accordingly, LIA voted to disband the Unclaimed Life Insurance Benefits (A) Working Group. In light of the disbandment, a representative of the Center for Insurance Research encouraged the STROOCK & STROOCK & LAVAN LLP 7

8 states to continue market conduct exams going forward, as the exams have been positive for the state-based insurance regulatory system, and have made a phenomenal difference for consumers. Status of VM-22 At its Spring Meeting on April 6-7, 2017, the Life Actuarial (A) Task Force ( LATF ) heard from the VM-22 (A) Subgroup, which had been charged with developing a principles-based reserve (PBR) methodology for non-variable annuities. LATF discussed and adopted the proposed VM-22 (Maximum Valuation Interest Rates for Income Annuities), which provides the methodology for determining valuation interest rates for income annuities and is designed to be more responsive to the economic environment than the current interest determination method. The new process will calculate rates monthly, rather than annually, and jumbo contract (>$250 million) rates will be contract-specific and set based on daily interest rates. Rates will be calculated by NAIC staff and posted on the NAIC website. VM-22 will go into effect on January 1, According to the NAIC, the rate determination process will rely on two main sources of data: (1) the Valuation Manual, which provides baseline asset default costs and investment spreads, and (2) the Federal Reserve website, which contains U.S. Treasuries data. The NAIC plans to develop a fully automated rate determination system. The credit quality of the currently-used Moody s index has drifted lower, which has resulted in valuation rates for Single Premium Immediate Annuities ( SPIA ) that are higher than originally intended. To maintain higher credit quality, the new VM-22 process pegs rates to a preset reference portfolio, which can be updated as needed, and includes U.S. Treasuries and corporate bonds with ratings A to BBB. According to the NAIC, the new rates will lead to more accurate statutory reserves and will lessen the need for asset adequacy testing adjustments. At its Summer Meeting on August 4-5th, 2017, LATF heard an update from the VM-22 (A) Subgroup. The NAIC has begun testing an automated process for determining rates, and plans to begin publishing the VM-22 valuation interest rates for jumbo and non-jumbo SPIA contracts. VM-22 covers SPIAs (including both life contingent and term certain only contracts), as well as other non-spia contracts (including deferred income annuity contracts, structured settlements in payout or deferred status, payout annuities resulting from settlement options or annuitizations from other contracts, supplementary contracts, and other similar fixed income payment streams). The Subgroup is in the process of developing reserved methodologies, and is observing the work of the Academy Annuity Reserve Work Group ( AARWG ) and the Academy Standard Valuation Law Interest Rate Modernization Work Group ( IMWG ). The methodology will allow the use of formula-based reserves, and for non-spias, a valuation interest rate determination process similar to the SPIA process is being developed for both model-based reserves and formula-based reserves. The AARWG reported that it has identified principles for an exclusion test for VM-22. The work group s initial focus includes hedge modeling, discount rates, stochastic scenarios, CTE calibration, aggregation, and standard scenario policyholder behavior. An AARWG representative noted that a number of fixed annuity products would use the Commissioners Annuity Reserve Valuation Method ( CARVM ), while products with optional benefits are more likely to be subject to stochastic testing, which is not captured in cash flow testing. The IMWG reported that it is working toward an update to the process of setting valuation interest rates for non-variable annuities and non-spias. The work group s initial approach will build on phase one SPIA work and include a single rate STROOCK & STROOCK & LAVAN LLP 8

9 locked-in at issue, which can be enhance[d] to reflect additional complexity as needed. Possible features to differentiate on include liquidity, interest rate guarantees, guarantee duration, and guaranteed living benefits. The IMWG has not yet decided whether the interest rate should be determined at issue date, annuitization date, or var[ied] based on [the] circumstances. By Bernhardt Nadell, a partner, Vincent Laurenzano, a non-lawyer consultant, and associates Gary Ho and Carolyn Cox of Stroock s Corporate Insurance Practice Group, partners Michele Jacobson and Robert Lewin of Stroock s Insurance Litigation Practice Group, and Chelsea Goulet, an associate in Stroock s Litigation Department. For More Information Bernhardt Nadell Vincent Laurenzano bnadell@stroock.com vlaurenzano@stroock.com Robert Lewin Michele Jacobson rlewin@stroock.com mjacobson@stroock.com Gary Ho Chelsea Goulet gho@stroock.com cgoulet@stroock.com Carolyn L. Cox cxcox@stroock.com STROOCK & STROOCK & LAVAN LLP 9

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